Ways to Minimize Your Tax Liability
Understanding how to leverage your various transactions so that they provide you with the greatest benefit is an important aspect of operating a business. Tax planning is an essential part of this understanding. Knowing how to conduct operations in a way that minimizes or eliminates your tax liability gives you a big advantage and boosts your overall profitability.
All too often, business owners don’t give thought to their taxes until it’s time to prepare their return. Though this is common, it works against the ability to take advantage of all of the options that are available. There are a number of credits, provisions and deductions that are more easily applied and understood when the business owner is mindful of them throughout the course of the year.
To accomplish this and get the greatest benefit, it is wise for business owners to meet with their accountant or tax professional on a regular basis so that income and expenses can be reviewed and analyzed. Quarterly or even monthly meetings are a good idea, as they can provide you with strategies that are suitable for the individual owner’s tax situation as well as for the business’ structure. These strategies can be highly complex or surprisingly simple, but all should have some or all of these goals:
- Lowering tax rate
- Reducing taxable income
- Creating a workable tax payment schedule
- Taking advantage of all applicable tax credits
- Planning for the impact of the Alternative Minimum Tax
- Minimizing the risk of making tax mistakes
Avoiding Suspicion of Tax Evasion
It is always prudent to have a strategy that reduces or eliminates taxes. However, it is important to stay within the framework of tax law in the process. Any type of concealment, deceit or subterfuge is considered tax evasion, and invites accusations of fraudulent intent from IRS examiners. The four red flags for fraud that the IRS looks for are:
- Not reporting significant income. Where the income does not support the other business and personal deductions claimed on the return the IRS becomes very suspicious. One of the issues they have is taxpayers not reporting cash payments made to the business or not reporting dividends that were received as part of shareholder benefits.
- Claiming deductions on a tax return that are either improper or for fictitious expenses. Examples include large charitable contributions for which there is no documentation or business travel expenses that are inflated.
- Improper record keeping and discrepancies between financial statements and tax returns that indicate possible accounting irregularities.
- Making inappropriate distributions of income designed to reduce tax liability. An example would include distributing income to a related taxpayer in a lower tax bracket, such as a business principal’s child.
The first step in creating an effective tax planning strategy is to have a good estimate of both your personal and business income. By calculating what the next few years hold, you can more accurately determine what your tax bracket will be, as well as avoiding mistakes that can lead to tax savings in one area and larger tax liabilities in another area.
Though these types of projections can be a challenge, giving it your best effort based upon the estimates you’re already working with for sales revenues and cash flow should make the process easier. Though the process may be time consuming – and even stressful – it is generally well worth the investment, as once you’ve arrived at an estimate with which you’re comfortable, you will be able to more confidently apply the various tax-saving strategies that are hidden within the tax code.
Using Business Entertainment Expenses to Save on Taxes
There are a number of ways that businesses can lower their tax liability, and one of the most popular is to ensure that all business entertainment expenses are included. In doing so, it is important that all IRS guidelines are followed in order to ensure that the expenses that you plan to deduct qualify. If the cost of a meal is to be deducted as a business entertainment expense, then it is essential that at some point prior to, during, or after the meal, business is discussed.
Making sure that a setting lends itself to the kind of focused conversation that is commonly found in business meetings helps to strengthen the legitimacy of an expense, where an environment that is filled with distraction such as a golf course, sporting event or floor show is more likely to be questioned. The deduction that has been allowed by the IRS for entertainment expenses has been set at 50% ever since 1994. The agency requires that all expenses are well-documented, and that business is conducted as part of the event or outing.
Using Automobile Expenses to Save on Taxes
The IRS permits businesses to write off automobile expenses that are incurred as part of doing business. There is a specific deduction rate that is applied to mileage, and that rate is periodically adjusted. For 2016, businesses are permitted to deduct 54 cents per mile traveled for business purposes. For those who are traveling in order to do charitable work the allowable expense that can be deducted is 14 centers per mile.
The agency also allows a deduction of 19 cents per mile for medical or moving expenses. If a business has multiple cars that are used for both business purposes and for personal, the business deduction can be taken for each one: To do so, it is important to keep track of which miles are used for business and then calculate the percentage against the total mileage. The business percentage can then be deducted. In order to ensure that this deduction is calculated accurately, a mileage log must be kept and information must be recorded diligently.
Using Home Office Expenses to Save on Taxes
More and more business owners are working from home and allowing their employees to do the same, saving the employer the cost of providing office space and saving the employees the commute to work. The home office deduction is becoming more commonly used, but can be difficult to calculate correctly and is subject to questioning.
In order for employees to claim a home office deduction, having the home office must be a condition of employment for which the business owner must provide documentation if the employee’s home office is challenged by the IRS.
As an alternative, the business owner can reimburse the employee for the expenses of the home office. If reimbursed under an accountable plan, the reimbursement would be tax-free to the employee, otherwise it would be income to them and they would have to deduct the expenses on their own tax return. Of course any home office deduction must comply with the strict IRS usage and exclusivity requirements.
Taking advantage of each of these tax-saving strategies can make a big difference in your business’ tax liability but it is important that you are certain that you qualify and are recording your expenses accurately. A tax professional can review your tax plan to help ensure that you are maximizing your benefits and minimizing your exposure.
For help with your tax planning, call our office for assistance at (407) 680-0900 to discuss your options.